Archive for the ‘English’ Category

Most investors believe that when investing in illiquid assets they are guaranteed to earn a so called illiquidity premium. First, that’s not true and second, it’s not so easy to get this insight across via purely economic arguments. I think a simple parable could be more convincing than sophisticated economics.

Let’s look at a famous episode of Homer’s Odyssee to illustrate the point. It is well known that Odysseus – before passing the land of the sirens – had himself tied to the mast of his ship and the ears of his sailors plugged up with wax. In this way he was able to enjoy the music and singing of the sirens. But being tied to the mast he could not steer the ship into the dangerous waters around the island of the sirens despite their luring sound. His sailor were able to hold steady course because they could not here the luring sound.

So, Odysseus gave up maneuverability (think: liquidity) to enjoy (read: get a premium) the beautiful sounds of the sirens. Clearly, giving up control over his ship was a necessary condition to get that joyful premium without wrecking the ship. However, tying yourself to a mast of a ship anywhere on an ocean and plugging up the ears of your sailors with wax will not make sirens sing. Or does it?

It’s a crime how They brought down MyWorld. Yes, there have been warnings from citizens of the possible negative consequences but most, myself included, did not see the risk. Or maybe we did not want to see the risk. In part this might have been because many of the objections brought forth were ideological in nature.
Many were against the financial link between our virtual world and the real world from the beginning when such ideas had been brought up. They considered it unfair that rich outsiders should be able to buy their way into our virtual world. Your status and what you own in a virtual world should only depend on what you build yourself these fundamentalists argued. However, since MyWorld allowed for barter and gifts this position could not be defended against the pragmatic majority of the community. It didn’t even require any campaigning by the Designers to influence the outcome of the referendum.
Critics got more and more silent as the economic benefits started to trickle through to everybody. Initially earnings from selling virtual goods were mainly considered pocket money. But as more and more outsiders with deep pockets but no time or no knowledge strove to establish a virtual presence it became possible for more and more producers of virtual goods and services to make a living out of what initially just was a very time consuming hobby. The volume of goods and services in MyWorld grew rapidly and after only five years the total size of virtual world economies was big enough to justify a separate category in the national GDP statistics.
By then critical voices had disappeared completely and nobody seriously thought that something might go terribly wrong. Only very slowly did we citizens get aware of suspicious phenomena. For example #Architect_99 had come up with a coating for surfaces that made them appear as if they were there and not there at the same time. Within a few weeks such coatings were seen on a lot of prestigious structures of MyWorld. The first appearances of such coating material not built by #Architect_99 were not disturbing. The coating consisted of Morix, Creduq and Shabnas elements and it was the pattern by which they were assembled that finally generated that mysterious glow. Since there were no patents or copyrights citizens were free to copy the idea. However, Creduq and Shabnas were rare and difficult to mine and this made it hard to imagine how suddenly so much of the coating material could be produced. More generally it seemed that prices for most goods in MyWorld constantly declined despite it not becoming easier to mine the raw materials.
Even in the light of these peculiarities the Secret Files came as a shock. But at last all the observed strange phenomena made sense. It was a shock to read that the Designers had used their superior insight into the MyWorld economy to spot commercial trends and then to reproduce such trendy goods out of thin air – a privilege only the Designers had – and sell them in large quantities and reap huge profits.
It might be difficult to take legal actions against the Designers since it is not always clear how national laws are applicable to virtual worlds. But whether the Designer will ever be charged with fraud is almost irrelevant. MyWorld is wasteland. After reputable brands withdrew from MyWorld prices collapsed indefinitely and most citizens left for other Worlds. Some hope remains, though. As long as the servers are not shut down there is a chance that some of the pioneers will come back and start transforming MyWorld again such that it might actually start looking much more like we used to know OurWorld in its early days.

I can’t pity John. He considers his dismissal totally unjustified and if one listens to him one is almost tempted to agree. He argues that nobody of reputation realized that there was a bubble and since it wasn’t obvious that there was a bubble he should not be punished for having lost money in it.

Sure, what is true for all bubbles was also true for the second internet bubble. That is they are easy to detect in hindsight. Some pundits claim, though, that it was indeed more difficult to spot. Well, let’s see. In contrast to the first internet bubble where most of the companies with sky high valuations did not earn any money this time was different. Companies did make money and a lot in fact. Finally internet companies had figured out how to monetize site traffic and the key to this was advertisements. Any web site be it a news site, a social media site or an online app that managed to attract a lot of users was also able to attract a lot of advertising dollars. Through personalization of the ads users could be targeted very effectively. Online advertising dollars became thus much more effective than traditional advertising dollars spent on mass advertising campaigns on TV, billboards or in papers. Consequently online advertising was grabbing market share from traditional channels at supersonic speed.

What investors seem to have missed were two things. First, as global internet advertising spending expanded its market share it soon dominated global ad spending. By attracting new segments of SME advertising the global advertising budget could initially be expanded along with market share. But saturation effects started to kick in nevertheless. The second problem was a decreasing multiplier. Advertising space on the most popular sites got very expensive. While increasing prices for premium adverting space benefited internet companies it lowered the effectiveness of every dollar spent.

It’s not clear what triggered the trend reversal. Companies tend to keep their marketing strategies secret. But it is rumored that Rolex was the first to observe that their brand was strong enough so that less permanent advertising presence was required to keep the brand at the top. By cutting back on advertising they were able to significantly boots profitability. It didn’t take long for other global brands to follow. They all reacted accordingly and within twelve months total internet advertising revenues dropped by 80% as prices for ad space as well as volumes dropped at the same time making the majority of internet companies worthless.

Those who claim that this bubble was more difficult to detect argue that the mechanism was more subtle. That is, it were not the internet companies that were the problem but other parts of the economy that expected an ever growing effectiveness of online advertising. But that is like looking at house sizes to detect a housing bubble. Fact is that more and more money was inefficiently invested in online advertising and John wasn’t the only one to profit from this misallocation. A misallocation that sooner or later had to backfire.